Banking Financial Risk Assessment Based On Entropy-TOPSIS Method

The steady operation of commercial Banks plays a positive role in China’s economic development.In recent years,commercial Banks have continuously strengthened their own system construction,optimized the governance structure,established effective management system and achieved good results.However,with the opening up process of China’s financial industry to the outside world accelerated,the international operation trend puts forward higher requirements for the whole banking industry,which bring many challenges.How to control risks effectively is the primary problem in the current bank governance process.Finance is related to all aspects of bank operation,so financial risk is the key point in bank risk prevention and control.Compared with international advanced foreign banks,the financial risk management of China’s commercial banks still stays in an initial exploration stage.According to the financial risks of commercial banks,how to recognize accurately,qualify reasonably,evaluate effectively with scientific method systems is particular important.In this paper,the financial risk evaluation system of commercial banks is constructed,the key indicators are identified by the statistical model,the financial risk is quantitatively evaluated,so as to provide theoretical basis and method reference for the financial risk control of commercial banks,and help China’s commercial banks to maintain their advantages in global financial competition.The paper combines entropy-weight method and TOPSIS method as an Entropy-TOPSIS model and the study process of commercial banks’ financial risks just as follows:(1)Domestic and foreign literature on entropy weight method,TOPSIS method and Entropy-TOPSIS method is summarized.This paper makes a concrete analysis from the aspects of historical evolution and research field.On this basis,this paper elaborates the relevant research on financial risk assessment of commercial banks.By summarizing the four types of literature,the paper lays a good theoretical foundation for the use of the method.(2)Refer to the definition of traditional enterprise financial risk,this paper try to define the concept of the commercial banks’ financial risk.On the basis of reference for regulators and experts research,the paper classify the financial risks of commercial banks from the liquidity risk,capital risk,credit and security risk,asset concentration risk,profitability risk,growth risk,and set the definition and do theoretical exploration.(3)Guided by the evaluation principles,this paper selects 14 indicators from six types of risks for the design of the index system.In combination with the characteristics of the Entropy-TOPSIS method,this paper also introduces two scale factor indexes,total assets and net profit.Thus,the financial risk evaluation index system is completed which constituted by 16 indicators.(4)This paper elaborates the principles of entropy weight method and TOPSIS method,applies the weight obtained from entropy weight method to TOPSIS method,and builds the evaluation model of Entropy-TOPSIS method.(5)This paper selects 29 listed commercial banks in China(including the large state-owned commercial banks,stock-holding commercial banks and local commercial banks)as a sample,uses financial report published in 2017 as the data source,analyzes positively based on the Entropy-TOPSIS method and gets 16 financial indicators’ weight in the risk evaluation and ranking results of 29 commercial bank’s financial risk.(6)According to the key financial indicators and bank risk ranking results identified by the model,this paper analyzes them and puts forward reasonable measures and suggestions based on the actual situation of banks.The empirical results show that among all evaluation indicators,bank size is the most critical factor in financial risk evaluation.In addition,credit security risk,profitability risk and capital risk are the risk areas that banks need to focus on prevention and control.In the order of bank financial risks,large state-owned commercial banks have the least financial risks,stock-holding commercial banks have the second highest,and local commercial banks have the highest financial risks.The innovation of this paper is the quantitative research on the financial risks of commercial banks with the Entropy-TOPSIS model,identification the key areas of risk prevention and control by the index weight.The risk ranking results of various banks are helpful for banks to carry out risk benchmarking and improve their risk awareness.At the same time,the scale factor is taken as the adjustment index,which improves the practicability and accuracy of the method.